Go to page

Go to page

LoanSafe Guide

In my opinion, there's no benefit in going through the throes of a short sale unless you're able and willing to stay current on your loans the entire time (up through close of escrow on your SS deal). Other than credit preservation, however, I believe SS is an onerous and futile process. Same with a DIL, which lenders hate to do, and thus have erected many hoops for borrowers to negotiate in order to effect one. If I come across as jaundiced, it's because of reading the posts and experiences of others! Bottom line: If credit preservation is important, do not stop making mortgage payments.

1) DIL - Deed in Lieu of Foreclosure: This is a real ordeal since loan servicers don't like doing them, and hence make borrowers jump through a multitude of hoops to accomplish one. The homeowner is required to provide financials to the lender. And the homeowner can earn no $$ for all the hassle. Usually the lender will require the property be listed for sale for a minimum of 90 days to qualify. In addition, the property normally cannot be encumbered with any other liens, e.g. junior loans, unpaid property tax, judgments, etc.

2) SS - Short Sale: Another solution that is a major pain, but the real estate industry loves and evangelizes them. The loan servicers also revere them because they know the homeowner will maintain the property in viewable condition. Meanwhile the homeowner gets no $$ for all their work and patience. Only reason to do one is credit preservation, and that is possible only if the homeowner has never been late on mortgage payments and can remain current through close of escrow of the SS deal. Another major disadvantage is that the borrower is required to disclose their financials, which is almost never a good idea, and is akin to pre-trial discovery.

3) Foreclosure: This is by far the least hassle. You don't communicate with your lender(s), aren't at their mercy, don't disclose any info to them. It's just easy. However, the downside is the derog credit hit. Recourse status of a 2[SUP]nd[/SUP] is immaterial because if the homeowner walks, and the 1st forecloses, the 2nd will be wiped out and become a "sold out junior." If that loan is recourse, they could conceivably sue you. But that’s only very rarely happening. Almost no "sold out junior" lenders in any state sue for money owed on the note, even though they're not legally barred from doing so.

For those residing in a judicial FC state, the possibility the lender might pursue a deficiency is not addressed here due to the legal complexities. Consulting with a RE foreclosure defense lawyer in that state is recommended.

Borrower Credit File/Score Impact

While many believe a SS or DIL may have a lesser impact on the borrower’s credit score, that has not proven to be the case. The following information is quoted from Fair Isaac’s site. FICO was developed by Fair Isaac.

"The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure are all 'not paid as agreed' accounts, and considered the same by your FICO® score. This is not to say that these may not be better options for you from a financial perspective, just that they will be considered no better or worse for your FICO score.

If you are considering bankruptcy as an alternative to foreclosure, that may have a greater impact to your FICO score. While a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO score."

"The destruction of FICO creditworthiness experienced by a homeowner who participates in a short sale is as dramatic as that wreaked by a foreclosure, since homeowners must default before the lender will even consider a short sale. The short sale/foreclosure which is ultimately reported will indicate that the owner did not repay the loan as agreed.

LoanSafe Member

2. You agree in writing to walk away from your home. (This is the banks dream - Easy Money).

3. You will have no future recourse against the bank. (Remember things are constantly changing). If you think there may be even the slightest chance of settlement for all their wrongdoing - kiss that option good-bye.

4. You must provide updated details of your financial condition & be certain the bank will use this information against you if possible. Remember, the bank is not your friend. They will decipher if it is cost affective to sue you for a deficiency judgment after your home is taken.

5. If it is to be sold in the near term, they will want the fastest sale, not necessarily the highest sale.

6. It is not primarily, as you may be told, to determine qualification for a modification, short sale, or DIL.

7. The bank would like to know where your bank accounts are & how much is in them so in the future they can attach them.

8. The bank wants to know where you work, see copies of recent pay stubs, so eventually they may garnish your pay.

9. The bank requires you provide all of the above to even be considered for a Short Sale.

LoanSafe Member

Tom and Freedom, thanks for this thread, it validates the strategy I sold to my husband. We started strategy default Sept on first, but due to his fears, I just learned he paid the Heloc this month so we won't start default on that until Oct, sigh......and, I used a no interest tease from my Chase CC to get our eyewear paid for, and Oct we will stop paying on that CC. In my thread I note that our first is Chase, formerly wa,u, our Heloc is Chase and our one big CC debt is Chase. They are so not going to like usWe did analyze doing SS, then DIL, then talked to attorney and or Merrill Lynch advisor and both said walking is better as we can save some money before being tossed out. I may not post many comments, but I watch this web site religiously. Thanks Tom, Fredom as you have both been so helpful.

LoanSafe Member

2. You agree in writing to walk away from your home. (This is the banks dream - Easy Money).

3. You will have no future recourse against the bank. (Remember things are constantly changing). If you think there may be even the slightest chance of settlement for all their wrongdoing - kiss that option good-bye.

4. You must provide updated details of your financial condition & be certain the bank will use this information against you if possible. Remember, the bank is not your friend. They will decipher if it is cost affective to sue you for a deficiency judgment after your home is taken.

5. If it is to be sold in the near term, they will want the fastest sale, not necessarily the highest sale.

6. It is not primarily, as you may be told, to determine qualification for a modification, short sale, or DIL.

7. The bank would like to know where your bank accounts are & how much is in them so in the future they can attach them.

8. The bank wants to know where you work, see copies of recent pay stubs, so eventually they may garnish your pay.

9. The bank requires you provide all of the above to even be considered for a Short Sale.

I'm trying a Short Sale in California with purchase money 1st & 2nd. I thought all of my research showed that the 1st and 2nd could not come after us for deficiency, sue us or garnish our wages as you mention in 4, 7 & 8. Is that not correct? Now I'm confused? help..... :huh: thanks for any additional insight.

LoanSafe Member

3) Foreclosure: This is by far the least hassle. You don't communicate with your lender(s), aren't at their mercy, don't disclose any info to them. It's just easy. However, the downside is the derog credit hit. Recourse status of a 2[SUP]nd[/SUP] is immaterial because if the homeowner walks, and the 1st forecloses, the 2nd will be wiped out and become a "sold out junior." If that loan is recourse, they could conceivably sue you. But that’s only very rarely happening. Almost no "sold out junior" lenders in any state sue for money owed on the note, even though they're not legally barred from doing so.

Tom: At the risk of sounding like a complete idiot, I will ask this question anyway. My husband and I are paying on our second mortgage, but I see many posts from people who are walking away from both the 1st and 2nd mortgages. We owe about 32K on the 2nd. The quote I have attached from you makes me wonder if we could walk away from our 2nd also. I will google the term "sold out junior" to see if I can understand what you are saying better, but if you could expand on this, I would really appreciate it.

LoanSafe Member

Thanks, Tom. When I googled "sold out junior" I found the thread you posted for me to read. It will take me some time to understand all of this. I am at the very least very uninformed and uneducated about all of the terms.

LoanSafe Member

1. If you are in a non-recourse state, many of the fears regarding financial disclosure vanish.
2. It can be a useful delay tactic if your goal is to stay in your home payment-free for a while.
3. Some government programs pay short sellers a $3,000-$5,000 fee toward relocation expenses.
4. A cooperative (but maybe unethical) real estate broker could split his commission with you.
5. The word "foreclosure" does not appear on your credit history.

LoanSafe Member

While many believe a SS or DIL may have a lesser impact on the borrower’s credit score, that has not proven to be the case. The following information is quoted from Fair Isaac’s site. FICO was developed by Fair Isaac.

I can tell you first hand that a SS shows just as bad on your CS or CR as a foreclosure in the eyes of all lenders. Know that most / all credit apps are now done by computer. If there is anything even remotely questionable it gets kicked out to be looked at by a human, at that point it most likely with be rejected. Back before I knew anything (pre-loansafe.org) my wife and I thought that we could easily get a loan against out house to pay off a 2nd from a SS on a second home. After all we had about 150K in equity sitting there even in 2010's market. Forget it, they rejected us for the SS calling it a "pre-Foreclosure"

We all know by now that CO's and lates are all a fact of life with a SS and we all know what that does to your CS and CR. But; i will post my story in the coming days regarding what i went through after the SS, I'm a year out now, how it effected me, what i was able to do in terms of credit, jobs and the likes. How I'm dealing with a CO of a 2nd that came with that and a no BS, real life factual synopsis of how you someone might deal with all this stuff.

One hint of things to come. We have all heard stories of collections types and collection agencies and what they can, will, might do. We have all heard what Lawyers types say, you know BK Lawyers, RE Lawyers and the likes. I got a wealth of real life, real time court room information on what banks can and can't do or won't do and all the good stuff, real cases not from a BK lawyer or RE Lawyer but a Paterns and contract Lawyer that I met at a fundraiser and became freinds with.

LoanSafe Member

I don't want to pretend that I'm in a hardship or not able to pay. I'm really looking to make a financial decision about what is best for my life going forward.

I'm getting confused and would love some perspective on my particular situation. I'm getting married soon and hopefully kids not long after that. I live in a small house (1000sqft) that I bought some time ago. One day I will need space. Sure I didn't have foresight... so I want to know what you all would do in my situation.

I was crazy and bought a 1.2M (I know thats a lot!) place that seemed like a good idea in 2007. I am in California and have never refi'd. I put down 5% initially. So I owe about 950k on the 1st and 170k on the 2nd. The house has held its price fairly well, but who knows until you sell it. I think it would sell for 1M +/- 50k. So its not underwater like some of these other properties. I can make my payments. I run a business and pay myself as needed. I don't want to pretend I'm in a hardship but I could make it look like that with my business wages. I have paid interest only since I've owned it. 6% on the first and 8% on the second. Both are 10 years interest only. The 1st goes to a 30year fixed payment after the initial 10yr. The 2nd loan balloons at the end of 10years, so I will owe 170k.

If I foreclose is there any situation (these are 1st time loans) that the second loan will come after me, I just want to be explicit and make sure in California?

I haven't explored refinancing, but I doubt they will let me without coming into it with some money and why would I do that when I'm already under? Everyone agree?

Other problem is if I sell the house, I have a hefty realtor fee to deal with so I end up being financial loser overall.

Options that have come up: 1) I am considering foreclosing... probably getting to live here for 9months without payment (effectively saving me 7k/month in mortgage expense) and I would save the realtor fee. BUT I would take a credit hit.

This seems to be the most extreme, clean and predictable option.... is this true?

I'm not overly concerned about my credit score.

Option 2 that came to mind: I wouldn't mind staying in the house and keeping it, but not sure if I am too financially stable to get a loan mod. I have a good sized savings and decent income. Also I don't necessarily want to let the bank know of my financial health.

Is it a bad idea to share my finances with the bank, in the event I want to foreclose or loan mod or short sell?

I have a few friends who have gotten to buy out there second loan for pennies on the dollar (12k on 160k owed) and refi'd the first at 3% for 30years. I would love this option, but not sure if I should stop making payments to get the banks attention. Should I stop making payments to get some attention, or do I actually try to be make an honest loan mod deal with them?

I would love to refi / loan mod at 1M or less at <5%.

How likely is this? This seems like I'd be getting a good deal to keep my house (which I do love) and I would do it at a bargain "price".

Option 3 : Short sale. Do I stop making payments to get their attention? This option does seem to decrease my credit score scar time. Do I get to live in the house without payment and wait to see if the bank sells the house without me throwing any money in? How long do short sales usually take?

This sounds good, but I'm not so sure... seems like if I got to live here for 3-6 months mortgage free and got rid of the house at the end, I'd be making out ok. This gets me out of the 6% and 8% interest rate too.
This option seems like a blend of foreclosure and credit score scar time... is this accurate?

I wouldn't mind keeping the house for 5 years, but I'm gonna need space for the family at some point. But if I need to take action, I want to get the ball rolling.

Any advice or other info needed from me for anyone to offer me words of wisdom?

I am just tired of being stuck at 100k negative equity at 6% and 8% interest rates that will catch up with me. I know its not as bad as a lot of folks situations out there, but nonetheless, there is savings to be had and something I could probably do about it.

LoanSafe Member

It looks like you seem prefer the full foreclosure route. If you recommend that I stop paying on both mortgages (both are with BofA) do I also not make my mortgage property tax payment which is due this December? My property tax bill isn't wrapped up into the mortgage like mosts. Secondly, if the 2nd loan is amenable to an agreement, it sounds like you are suggesting a modification? Am I correct?

Are you recommending I skip the short sale objective and focus on the foreclosure route?

And am I a completely safe about BofA not being able to come after my assets since I am in CA and never have refi'd?

Is there any risk of trying to do the loan mod and exposing my finances to the banks?

LoanSafe Guide

Thanks for your update. My last post unfortunately was unclear; I unfortunately got interrupted and distracted, and left it unfinished in mid thought, LOL.

I recommend you take your time in deciding whether you want to keep the home. Since you're current on your loans you have the time to formulate your plans. Whether a loan workout with your lender, or eventually a refinance.

Yes, in order to do a loan workout, your lender will ask you for financial info. You might conceivably be able to circumvent that, but you would likely need to get a lawyer involved, one is adept and experienced at loan restructuring. And that path will obviously cost more, but might be worth it. Finding the right lawyer is a non-trivial exercise. However, you're close to the best ones since you're located in SoCal, the locus of the FC defense industry.

Unfortunately, due to the fact that you aren't a hardship case, government programs aren't available to you.

You're correct that both of your loans are non-recourse.

If you should decide to dispose of the house, I recommend the FC route, for reasons stated in post #1. To start that process, simply stop paying both loans and property tax. You needn't ever communicate with the lender, and I recommend you don't. That is, unless you play the HAMPster Wheel Game, and communicate with the purpose of obfuscating.

LoanSafe Member

I guess, I would love to keep the house at a new rate and even better, reduced principal rate. I just don't know if it is possible? I don't mind playing the Hampster game, it actually sounds kind of fun.

Am I on a timeline to try to foreclose by end of 2012?

So if both loans are non-recourse, there really is no hurt in them knowing my finances, as they ultimately can't do much aside from trying to pressure me right? It seems that they won't be inclined to really find that I'm in distress... so when you say "workout something with my lender" is that something I should try prior to stopping payment... is that just a refi or an actual loan mod?

Did recommend an attorney purely for the fact that I would prefer to keep my financials secret? I was originally wanting to hide my finances so that they don't get tempted to come after me? But in non-recourse, that point is moot right? Second issue with financial reveal, is that it might dissuade them to throw me a bone for "loan working out"?

Are you in this business, or just have an interest? Can I call you at your business if so to enlist your advice?

LoanSafe Guide

Thanks for your update. Yes, the HAMPster Wheel Game is fun. If you ultimately decide to FC, I would recommend you play.

You're correct in your statement that financial foreclosure can't hurt you as far as being sued by your lenders. However, by disclosing, you might be classified as a "strategic" defaulter. I don't know if and how that will be done on non-GSE loans, but the major CRAs have been in active discussions with their customers, the lenders, on how to develop algorithms that will help identify those borrowers and flag them as probable strategic walkers.

A "loan workout" can include any number of solutions that will help both the borrower and lender. Loan workouts have long been commonly done on commercial loans. And yes, the success of a loan workout could be dependent on the borrower's financials. As in any negotiation, it's not smart to impart information unnecessarily to one's adversary.

Personally, I am an interested contributor and don't do this as a business. But thanks for inquiring!

LoanSafe Member

Isnt' there another worry about the loan being above 800k and being liable for taxation as a result? I think I'm over the CA limit on these debt forgiveness things.... but I think I'm ok for federal IRS right?

Also, if the 1st loan eats up the house and the 2nd isnt satisfied at all, they could still come after me legally correct?

(geesh)

I guess I am worried that I will walk, find out the second loan still wants their money... and if I disclose my assets they will know I have it to get... then I will also be taxed in CA for the "gain" of the 1st loan foreclosing....? In the end, I could be not very net positive and with bad credit. Maybe this whole thing is a bad idea for me, particularly because my house is only 10% under and I'm in a Jumbo loan range?